US manufacturing ISM slipped to the lowest level since July. US treasury yields higher despite weak ISM. Small moves for G10 currencies

US equities have started the new month with a soft tone. S&P futures declined during Asian trade yesterday, amid a sharp selloff in cryptocurrencies, and the cash market is marginally lower in afternoon US trading. The US dollar slipped against major FX pairings while global bond markets are higher in yield. Oil prices gained after OPEC+ confirmed over the weekend that it will continue with plans to pause production hikes during the first quarter of next year. Silver prices extended higher and reached a fresh record above US$58 per ounce.

The ISM manufacturing index fell to 48.2 which is the lowest level since July. The ISM survey has been below 50 for nine consecutive months and suggests that the manufacturing sector continues to face headwinds, although other indicators have painted a more upbeat picture. The prices paid subindex was little changed at 58.5 while employment and new orders both declined.

US treasuries moved sharply higher in yield, led by the longer end of the curve, with a pickup in expected corporate supply, partly attributed to the move. The ISM was released when yields were already higher and had limited impact on price action. Global bond markets were broadly under pressure after a selloff in Japan on the increased prospect for a rate hike this month. 10-year treasury yields increased 8bp to 4.09% and the 2y/10y curve steepened 3bp to +56bp.

Comments from Bank of Japan Governor Ueda implied the central bank could hike rates at its 20 December meeting if the economic outlook is realised. He said that any hike would merely be an adjustment to the degree of easing. The yen gained following the comments and 2-year government bond yields increased above 1.0%. This is the highest level since 2008 and reflects increased expectations for a hike. The market is pricing 22bp of tightening for the December meeting, compared with 15bp at the end of last week.

The RatingDog PMI in China was weaker than expected and fell marginally into contractionary territory. This survey is concentrated on small export-orientated firms compared with the official PMIs which tend to focus on the larger state-owned companies. The official PMIs were released in the weekend. Collectively the surveys suggest the economy is struggling for traction with consumer demand still sluggish.

The yen has been the best performing G10 currency since the global open yesterday, and has made further modest gains overnight, set against the backdrop of a softer US dollar against the major pairings. There has been limited net moves for the NZD and AUD offshore. NZD/USD oscillated in a narrow range around 0.5740. NZD/JPY slipped towards 89.0.

The selloff in NZ fixed income continued in the local session yesterday led by the back end of the curve. 2-year rates closed 2bp higher at 2.89% while 10-year rates increased 8bp to 4.00%. The 2y/10y curve re-steepened to +111bp having dipped to +105bp after the RBNZ last week. Although the Australian market was trading a touch heavy, there was no obvious catalyst for the sharp bear steepening in the NZ curve apart from ongoing position unwinding.

The government curve also repriced higher in yield and continued to outperform relative to swaps. 10-year bond yields increased 6bp to 4.41% while matched maturity swap spreads declined to +36bp, the lowest level in more than a year. Australian 10-year government bond futures are ~3bp higher in yield terms since the local close yesterday suggesting an upwards bias for NZ rates on the open.

NZ Q3 terms of trade is the only domestic data scheduled today. It is a quiet international calendar. Fed Chair Powell is scheduled to speak, though he is barred from commenting on the economic outlook or policy, given officials have entered the pre-FOMC blackout period. Labour market and preliminary CPI data is scheduled for the euro area. Regional data for the major euro area economies released at the end of last week were mixed. The consensus estimate is for headline and core CPI to remain unchanged at 2.1% and 2.4% respectively.

Stuart Ritson is a Markets Strategist at BNZ Markets.